Good morning,
Single currency, double optimism
The euro has continued its post-French election run higher in the past 24 hours with both political and monetary policy factors going in the single currency’s favour. Marine Le Pen’s position on a so-called Frexit was challenged in the press yesterday and the rowing back of some of her more vehement language to express that she understood fears that French savers may have over pension redenomination into a devalued currency will have helped.
Similarly, ahead of the European Central Bank meeting tomorrow the euro has taken a leg higher on the expectations that the central bank may feel a little more comfortable with conversations of withdrawing stimulus from the Eurozone economy should the risk of a political shock have fallen courtesy of Sunday’s vote. They would never say so of course but tomorrow’s policy statement will likely allude to a rolling back of negative sentiment since the beginning of the year both economically and politically.
VAT receipts fall in UK for first time in 5 years
UK news yesterday was weak and while headline numbers suggest that Chancellor Hammond just missed his borrowing target for the 2016 financial year that his next budget is going to be a very difficult needle to thread. Following an unwillingness on the campaign trail to rule out increase in either income tax, national insurance or VAT following the election, yesterday’s data confirmed that government tax receipts, especially from VAT, were poor in Q1. A weak retail environment limits VAT capture and given it made up near 20% of all UK government revenue last year and the level of receipts fell for the first time in five years in Q1 we have to ask what happens with tax and spend following the election.
Currently the UK government is running a £52bn budget deficit.
Election news was thin on the ground; Theresa May wants to ‘lead the world in preventing tourism’, a leading Conservative MP and Chair of the Treasury Select Committee will not be standing for re-election and Yougov published some interesting analysis of when and why voters vote for who they do. None of this was worthy of moving the pound but kept us amused enough to forget that we still have 6 more weeks of this.
Wall funding postponed and battles on taxes upcoming
Trump is back to doing what populist politicians do best it seems; rowing back on promises and picking fights with supporters. President Trump has backed down on his request to have his wall between the US and Mexico funded this week although still maintains that it will a) still be built and b) be paid for by Mexico. In addition fiscal conservatives, those who worry about the level of spending versus income on the government balance sheet, seem up in arms about the Trump tax plan to cut the US corporate tax rate from 35% to 15%.
Such a cut would make the US government $2.2 trillion poorer over 10 years, a hole that the Trump administration believes a reinvigorated economy could fill. We have our doubts over the sustainability of that expectation.
Getting his plans through Congress will once again prove difficult and a re-run of the Trumpcare debacle and the subsequent dollar weakness could easily be seen.
Once again the data calendar is on the quiet side today.
Have a great day